Excersise Essay Example

Question 7

A perpetual inventory system records inventory in real time as and when purchases are made or stock is sold. In addition, it allows accurate records of restocking an organization. This means that it prevents chances of a stock out as we are able to monitor stocks that are running low. Another reason is that with the perpetual system, spillage, theft, fraud and shrinkage cases are easily detected which allows for investigation of the discrepancies. This will be after reconciling year-end balance with the current balance in the inventory system. All the aforementioned reasons will thus eliminate the need for frequent costly stock takes allowing the management to produce more accurate financial reports.

Question 9

Understating ending inventory results to overstated cost of goods sold which results to an understated gross profit consequently net income. If left unchanged, in the following year, the understatement in the previous periods affects opening balance of the following period. This will result in direct opposites of the previous effects. Cost of goods sold will be understated, overstating both the gross profit and the net profit. The balance sheet’s, both the assets and owners equity will be understated, with no effect on liabilities.

Question 19.1

Specific cost method

Cost of goods sold

Cost of Goods Sold

Gross profit

Weighted average cost method

Cost of goods available for sale is $6,415

Units available for sale are 2,000 units.

Therefore, weighted average cost per unit is $3.21 ;( closing stock 700*3.21=$2,245)

Sales $5,525

Cost of goods available for sale $6,415

Less closing inventory ($2,245)

Cost of goods sold $4,170

Gross profit $1,355

FIFO-(closing inventory is valued at the last purchase price)

Sales $5,525

Cost of goods available for sale $6,415

Less closing inventory ($2,740)

Cost of goods sold $3,675

Gross profit $1,850

Sales $5,525

Cost of goods available for sale $6,415

Less closing inventory ($2,100)

Cost of goods sold $4,315

Gross profit $1,210

LIFO has lowest closing inventory and lowest gross profit. FIFO method has the highest gross profit and the highest closing inventory. This is why most companies use LIFO method regardless of inventory system used, especially in rising prices economy.

Workings

Workings for Specific cost

per unit cost

Total cost

Beginning Inventory

Cost of goods available for sale

per unit cost

Total cost

Beginning Inventory

Ending inventory

Cost of goods available for sale

Less closing inventory

Closing inventory

(500*3.5+200*3.3)

Closing inventory (700*3.00)